Off the PCA hook, banks bet on loans to small biz and agriculture sector

Exiting the Reserve Bank of India’s (RBI’s) prompt corrective action (PCA) framework may not exactly be a lease of life for banks. However, it certainly paves the way for them to scale up their loan book, especially to retail, micro, small & medium enterprises (MSME) and the agriculture sector.

Senior executives of banks that have come out of the PCA said lenders were engaged in improving credit underwriting standards under the framework. 

The Reserve Bank of India (RBI) has taken out six of the 12 banks from PCA. Bank of India (BoI), Bank of Mahar­ashtra (Mahabank), and Oriental Bank of Commerce (OBC) exited the restrictive regime early this month. Allahabad Bank, Corporation Bank and Dhanlaxmi Bank followed the suit on Tuesday.

“The restrictions on recruitment and opening new branches are gone. Banks have done a lot of work on ratio­n­alisation of branches. Now, we can look at taking fresh talent and expanding network to support business growth, said a senior executive with Mahabank.

An Allahabad Bank executive said, “After recapitalisation, the growth in capital available to the bank will be lim­ited, and we would like to limit exposure to risk-weighted assets. But the bank would have leeway to lend in areas in which it is currently not lending. It will be a tightrope walk,” T Latha, managing director & chief executive office (CEO), Dhanlaxmi Bank, said it has stepped up monitoring and recoveries. The private lender would focus on retail and MSME loans. Also, it would grow gold loan book in states like Tamil Nadu and Kerala. The collateral cover is high and defaults are low in this category.

Much of the capital went in provisions for bad loans, and now, it will need more capital for growth. Allahabad Bank has started chalking out plans to raise growth capital, as the recapitalisation of Rs 6,896 crore would go towards meeting the regulatory capital requirement.

Exit from the PCA framework gives a leverage to raise funds from the market. Banks would look at raising equity capital in the middle of FY20. The amount would be fixed when the bank finalises business plans for next year, said Dhanlaxmi Bank CEO.

Rating agency Fitch said exit from the PCA framework frees these banks from stringent restrictions on growth. However, leaving the PCA framework will not remove the constraints on growth imposed by weak capitalisation. 

For further growth to take place, the government will have to inject more capital into these banks or there has to be a strong turnaround in profitability that will support internal capital generation. This looks unlikely, it added.